CEO compensation levels off

Tuesday

The median pay for CEOs at large companies with annual revenues ranging from $7.4 billion to $40 billion was $9.4 million, nearly identical to the previous year.

Pay for CEOs leveled off in 2007 as public companies continued to shift away from stock options as a compensation tool. The median pay package for chief executive officers at most large companies remained essentially the same or declined somewhat compared with 2006 levels, with pay dropping notably among some of the biggest companies, according to an analysis of proxy statements by Mercer, the human resources consultancy.

The study found that the trend away from stock options and toward performance-based stock awards continued in 2007.

“Companies are focused on making sure there’s an alignment between pay and performance,” said Deborah Bilak, a principal at Mercer’s Boston office.

Long-term incentives – generally, cash or stock awards tied directly to specific performance goals – have become almost as popular as stock options, according to Mercer. Boston-based State Street Corp., for example, gives its top executives a combination of cash and restricted stock awards as part of its annual incentive plan.

Mercer defines total direct compensation as base salary, short-term incentive compensation and the expected value of long-term incentives granted during the year.

By that measure, the median compensation of CEOs at the country’s 50 biggest companies – those whose companies had annual revenues of at least $40 billion – was just under $14 million, a drop of 15.8 percent from the previous year.

The median figure for large companies with annual revenues ranging from $7.4 billion to $40 billion was $9.4 million, nearly identical to the previous year.

Meanwhile, median pay at mid-sized companies with at least $1.2 billion in sales fell 4.6 percent to $4.7 million, according to Mercer.

Paul Hodgson, a senior research associate at The Corporate Library in Portland, Maine, said his analysis of proxies filed this year shows that CEO pay packages are still going up, but just not at the same pace as previous years.

“It’s increasing, but it’s not increasing by 15 or 30 percent, which is what we found in prior years,” Hodgson said.

Hodgson attributes the slowdown to the fact that several key sectors of the economy – such as housing, construction and financial services – suffered last year, affecting the payouts for executives who work in those industries.

He also said the scandals involving the back-dating of stock options – in which companies improperly set stock option strike prices at artificially low levels – have encouraged some companies to reduce their emphasis on stock options in executive compensation packages.

Long-term stock options make up nearly two-thirds of CEOs’ total compensation, according to the Mercer study. But options declined sharply in 2007, with an 18.9 percent decrease among large companies in the survey.

The use of stock options contributed to the subprime mortgage crisis, the AFL-CIO argued in a recent analysis of financial companies’ compensation practices.

As the poster boy for stock options gone wrong, the AFL-CIO singled out Countrywide Financial CEO Angelo Mozilo, who pocketed $414 million by exercising stock options between 2004 and 2007.

The options rewarded short-term stock performance, but gave Mozilo the incentive to pursue risky short-term investment strategies, said Daniel Pedrotty, director of the AFL-CIO’s Office of Investment. Countrywide suffered heavy losses in the mortgage market last year and was forced to seek outside help, eventually agreeing to be bought by Bank of America.

“Was he incentivized to drive up the value of Countrywide in the short term to show artificial growth?” Pedrotty said. “They ended up making risky bets that deepened the impact of the bubble.”

The AFL-CIO has long been critical of using stock options to reward executive performance, arguing they divert CEO’s attention from building the long-term value of the company while hurting investors.

Corporate directors are incapable of protecting shareholders’ interests because most are nominated by management and because CEOs chair the board of directors at two-thirds of companies, the AFL-CIO argued.

The AFL-CIO wants a change that would enable directors to be elected with a majority, rather than mere plurality, vote of shareholders. It also wants a more open election process for directors, allowing shareholder-nominated candidates to appear on the ballot without having to pay for the cost of mailings.

Despite resistance to some reforms, companies are moving in the direction of more accountability, said Mike Enos, a partner with compensation consultants Pearl Meyer & Partners.

Pearl Meyer studied 50 companies that have submitted proxies for two years under the SEC’s expanded executive compensation rules.

In 2007, CEOs’ average salaries increased by about 3 percent, while annual bonuses dropped because of the economic climate and declining corporate performance, Enos said.

But long-term incentives, generally in the form of equity tied to specific performance goals, increased in 2007.

“We are seeing a lot more companies incorporating performance-based restricted stock awards, which aligns well with the interests of the shareholders,” Enos said.

Companies are also responding to calls for more transparent reporting of how they reward executives. Of 44 companies with performance-based annual bonuses, 57 percent disclosed the goals used to evaluate performance in 2008 proxy filings, up from 43 percent in 2007.

The Patriot Ledger calculated 2007 pay totals for CEOs of local public companies by using a method recommended by The Corporate Library, a corporate governance research firm in Portland, Maine. The totals include any options that the CEO exercised last year and any restricted company stock that vested during the year, but they do not include accounting estimates for restricted stock and option awards that were awarded to the CEO that year.

Never miss a story

Choose the plan that's right for you.
Digital access or digital and print delivery.